If
James Packer
’s intention when investing in
Echo Entertainment
was to inflict as much damage on the rival casino operator as possible, then he has succeeded.

Echo shares fell 12 per cent on Friday to an all-time low after the billionaire sold his strategic stake in the company, ending his 16-month presence on the competitor’s share register.

Without the prospect of a takeover bid underpinning the stock, the spotlight is back on Echo’s strategy and concern about how it will fund expensive expansion plans in Sydney and Brisbane.

As well as further destabilising Echo, the entire exercise has provided a huge distraction while Packer’s
Crown Ltd
was busy preparing its proposal for a rival VIP gaming facility on the waterfront at Sydney’s Barangaroo site.

Packer’s ambition to operate a casino in Sydney is of course the driving force behind the Sydney gaming wars and his decision to invest in Echo in the first place.

That prize is still very much on the table, but Echo has not given up either. Chairman
John O’Neill
and the board have spent the last two days locked away in The Star casino preparing an alternative to Crown’s Barangaroo plan which it will submit to the New South Wales government by June 21.

If I were a betting man (which I’m not), I would put money on Packer’s proposal getting the nod. Packer and his advisers have been on the front-foot during the campaign which has been fought on almost every level in government, the media, the boardroom and with shareholders. However, Echo may still have an ace up its sleeve if it can produce a proposal compelling enough to convince Premier
Barry O’Farrell
and an advisory panel chaired by David Murray to side against Packer.

Echo’s strategy is to develop the Darling Harbour-Pyrmont area in a way that enhances its status as the city’s tourist precinct. It will seek to tie in with the government blueprint for tourism and jobs. The details, unlike Crown’s, remain confidential, but it is understood to involve significant investment in infrastructure to provide an incentive for local transport links and hotels. Echo also wants its exclusive licence extended beyond 2019.

Related Quotes

Company Profile

There have been suggestions this week that Packer sold out because he has already been given the nod on Barangaroo. Hopefully, the NSW government is not that stupid. Confusion over comments O’Farrell made in February, around whether Packer would need a casino licence, fuelled speculation it as already a done deal.

Setting up what is described as an independent panel to assess the two proposals has been designed to put that kind of talk to rest.

The other problem for Echo is doubt over how it will fund its proposal. It is also looking at a $1 billion development in Brisbane which may also develop into a second battleground for Echo if reports that the Queensland government may consider a second licence there are correct.

Analysts have raised the possibility of a capital raising to fund Brisbane although work on that site is still three years away.

Friday’s share price fall also reflects concerns about weak growth in The Star’s higher-margin business. It has been a nightmare run for Echo since it was spun off from
Tabcorp
in 2011. A sexual harassment scandal at The Star, the company’s abysmal relationship with the NSW government, the Packer campaign and a change of chairman and chief executive have been hugely disruptive. Echo has a lot to lose if Packer gets his way in Sydney. Deutsche Bank analysts say Crown would have to generate $23 billion in VIP turnover, which is what The Star is currently rolling, and would require a 30 per cent increase in the Australian market, to make an economic return on the project’s capital cost.

Packer’s investment in Echo has come at a price although it was always going to be a strategic play centring on his ambitions for Sydney, which lacks a Crown casino, unlike Melbourne or Perth.

Analysts estimate Packer, who sold out for $264 million, made a $35-$38 million loss on the Echo investment. In its half-year results, Crown Ltd noted a $52 million after-tax market-to-market loss on the investment, due to a decline in the Echo share price. In its June 30, 2012 accounts, the value of Crown’s listed investments in Australia is valued at $363 million (including $11 million in Tabcorp swaps).

Echo will also argue that Sydney must be prepared to decide whether it wants two large casinos operating in the city if Packer is given the green light.

GFC hangover no reason for sadness

David Jones’s champagne and Delta Goodrem-fuelled 175th anniversary bash at its Sydney’s store on Thursday night was a contrast to the doom and gloom pervading the mining services and manufacturing sectors this week.

Ford’s decision to exit manufacturing in Australia and the wave of earnings downgrades and job losses at companies exposed to the mining sector will further erode confidence. However, sentiment in Australia is schizophrenic with business leaders and regulators questioning why people are so down in the dumps when the local economy is outperforming many other parts of the world.

One former Reserve Bank board member told Chanticleer on Friday that part of Australia’s problem is that it is belatedly dealing with the hangover of the global financial crisis. While Europe and the US went into austerity mode after the GFC, Australia continued to spend up big and was now paying the price.